NDCA denies motion to strike reports for inadequate apportionment in lost profits and reasonable royalty; allows testimony on disputed licenses and offer to license

On February 21, 2014, Judge Alsup of the Northern District of California issued an opinion in Plantronics, Inc. v. Aliph, Inc., Case No. C 09-01714 WHA, in which the court denied motions to strike defendant's damages experts on lost profits (Matthew R. Lynde) and reasonable royalty (Brian Napper). The case was a competitor suit involving bluetooth headsets. The opinion has several interesting issues, but the most significant is the treatment of apportionment and lost profits. Judge Alsup, in effect, held that the Panduit test only requires proof of demand for the patented product, and thus the plaintiff need not prove demand for the patented feature, thus avoiding the entire market value rule.

The patented feature was a "concha stabilizer," also called an earbud, that supports a headset staying the ear. The accused products were earbuds sold separately or in combination with Aliph's bluetooth headsets. The earbuds are detachable from the headsets and are sold in bundles with the headsets, or separately as spare or replacement parts. Judge Alsup specifically recognized: "To be clear, the asserted patent does not cover most aspects to Aliph's headsets, and the parties do not so contend. Both Plantronics' and Aliph's headsets contain software and hardware components, including bluetooth technology, speakers, and noise-cancellation features." Slip op. at 2 (emphasis in original).

Lost profits:

Aliph contended that Dr. Lynde failed to apportion consumer demand for the allegedly infringing features; Aliph cited to reasonable royalty decisions. Judge Alsup, however, cited to Versata Software v. SAP for the proposition that "[t]his supposed duty [to apportion consumer demand for the allegedly infringing features] ... under the first Panduit factor is not required ...." Slip op. at 3 (quoting Versata). The court further addressed the legal and factual principles at play, and it is worth quoting this portion of the opinion at length:

"Instead, the first Panduit factor simply asks whether demand existed for the 'patented product,' i.e., a product that is 'covered by the patent in suit' or that 'directly competes with the infringing device.'" DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc., 567 F.3d 1314, 1330 (Fed. Cir. 2009). There is ample evidence from which a jury could reasonably conclude that there was and is demand for the patented part of the goods in question, the earbud using the claimed design.

That Aliph can point to deposition testimony that identifies other drivers of demand for the overall bluetooth headsets like audio performance, ability to suppress wind noise, and noise cancellation technology is of little moment. This is fodder for cross-examination. Reasonable experts can disagree about the driver of demand for overall bluetooth headsets, but the bottom of it is that the first Panduit factor as construed by the Federal Circuit does not require more than demand for the patented product, i.e., the earbud part.

****

Is this proper? That is, is it proper to leverage the small earbud item to reach sales of the vastly more expensive bluetooth mobile headset? Upon a proper showing, the answer is yes under the law of the Federal Circuit where lost profits are concerned. The Federal Circuit has recognized that upon a proper showing, lost profits may be recovered for convoyed sales:

A "convoyed sale" refers to the relationship between the sale of a patented product and a functionally associated non-patented product. A patentee may recover lost profits on unpatented components sold with a patented item, a convoyed sale, if both the patented and unpatented products together were considered to be components of a single assembly or parts of a complete machine, or they together constituted a functional unit. Our precedent has not extended liability to include items that have essentially no functional relationship to the patented invention and that may have been sold with an infringing device only as a matter of convenience or business advantage.

Am. Seating Co. v. USSC Grp., Inc., 514 F.3d 1262, 1268 (Fed. Cir. 2008) (internal citations and quotations omitted). See also Fujifilm Corp. v. Benun, 605 F.3d 1366, 1373 (Fed. Cir. 2010) (per curiam). The test is whether the allegedly infringing component and other components constitute a functional unit or hold an interrelated relationship such that they are parts of a complete machine. Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1550 (Fed. Cir. 1995). Inextricably intertwined components functioning together can support recognizing the single unit. Bose Corp. v. JBL, Inc., 274 F.3d 1354, 1361 (Fed. Cir. 2001). Here, even though earbuds can be purchased separately as spare or replacement parts, it would be reasonable for a jury to find that an earbud alone without the bluetooth device is of little to no use to a consumer. The earbud is a plastic or foam attachment that allows the bluetooth device to stay in the ear. This is not to say that the jury cannot find that Plantronics' expert inflated his findings. That shall be within the province of the jury. It is just to say that at this point, this order will not bar Dr. Lynde's opinions altogether from being offered to the jury. A reasonable jury could find that the test for convoyed sales has been met. Dr. Lynde's opinions may be presented at trial to the jury and Aliph will have the opportunity to raise admissible competing evidence and to cross-examine Dr. Lynde.

Slip op. at 3-5.

Judge Alsup also distinguished Ferguson Beauregard/Logic Controls v. Mega Systems, LLC, 350 F.3d 1327, 1346 (Fed. Cir. 2003), a case in which the Federal Circuit applied the entire market value rule in the lost profits context. According to Judge Alsup, that case was distinguishable because there the district court's findings were deemed clearly erroneous because it based "lost profits on a product with features from the asserted patents and other patented features when there was another product which only embodied the features of the asserted patent." Slip op. at 7. Judge Alsup opined that the situation was different in the case at bar, because "both sides sell headsets with bluetooth technology and noise suppression features. In that way, Dr. Lynde has focused his opinion on vastly similar competing products." Id.

Reasonable royalty:

Aliph attacked Mr. Napper's reasonable royalty analysis under Georgia-Pacific because, according to Aliph, he failed to analyze apportionment adequately. Judge Alsup disagreed, finding that Mr. Napper had "already apportioned to the smallest salable patent-practicing unit, i.e.., the accused earbud, where possible." Slip op. at 8. The court also cited Mr. Napper's analysis under factor 1, where he had examined allegedly comparable license agreements and an offer by Plantronics regarding the asserted patent.

Concerning a Motorola development and supply agreement, the court held Mr. Napper could testify about it because it concerned earbuds, and because he had backed out unit cost and O-ring cost. The court held that Mr. Napper could refer to gross margins in the agreement, provided he expressly acknowledge that these numbers included more than just a reasonable royalty because they also included labor and profit.

The court also allowed Mr. Napper to testify on an offer by Plantronics to third party Primax to license the asserted patent at $0.25 per unit, as well as a license between Aliph and Freebit where Aliph paid $0.25 per unit. The court concluded "these are the only allegedly comparable licenses." Slip op at 8. There were issues with comparability of those licensees the Primax deal was never consummated, the Freebit license was for headsets but the court allowed them. Judge Alsup cited the fact that both experts addressed the license as "next best" evidence because Plantronics had never entered into a per earbud license for the asserted patent. The court also noted that it would be unfair to strike Mr. Napper's report for failure to apportion when Aliph's expert had relied on the same licenses. Id.